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Hacking case belies profitable US links with China

Paul Wiseman AP Economics Writer

Posted:
05/26/2014 09:11:25 AM MDT

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FILE - In this Jan. 17, 2011 file photo, American and Chinese flags fly along Pennsylvania Avenue in front of the White House in Washington. The Justice Department?s indictment last week of five Chinese military officials charged them with trying to pilfer confidential information from American companies. But even some of the alleged U.S. corporate victims of the hackers have little incentive to cheer any trade rupture with China. (AP Photo/Carolyn Kaster, File)

WASHINGTON (AP) — China may be trying to steal trade secrets from U.S. businesses, as federal prosecutors allege. Yet for many U.S. companies, China's vast market remains an irresistible source of business.

The Justice Department's indictment last week of five Chinese military officials accused them of trying to pilfer confidential information from American companies. But even some of the alleged U.S. corporate victims of the hackers have little incentive to cheer any trade rupture with China.

A third, Alcoa, is the biggest foreign investor in China's aluminum market. Indeed, Alcoa went so far as to downplay Justice's charges: "No material information was compromised during this incident which occurred several years ago," the company said.

American companies are in a delicate position. They want to maintain good relations with China, the world's second-biggest economy and a market where U.S. firms' earnings grew nearly 50 percent last year. But they're also increasingly fearful of Chinese hackers stealing their trade secrets.

Looked that way, the hacking case is "going to be positive in opening up the conversation," said Jamian Ronca Spadavecchia, founder of the Oxbow Advisory, which advises companies about risks in China and other emerging markets. "It's bringing into the open some of the issues U.S. companies are facing."

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A U.S.-China Business Council survey has found that cybersecurity is a growing threat for U.S. companies in China: It jumped from to No. 14 last year from No. 23 in 2012 on a list of gripes about the Chinese market. American companies are also increasingly irritated by China's attempts to censor the Internet, according to a survey by the American Chamber of Commerce in China.

The confrontation over hacking — China rejects the charges as based on "fabricated facts" — highlights the often-awkward relationship between China and the United States. They're frenemies in a globalized world — rivals and partners in both politics and economics.

U.S. companies complain that China is becoming less hospitable to foreign companies. They cite policies that give Chinese firms an edge over foreign competitors, cumbersome licensing requirements and endless struggles to protect their intellectual property — from software to music to clothing design — from theft.

For all the complaints and tensions, U.S.-China business ties are tight and getting tighter.

Last week, even as the hacking controversy raged, former U.S. ambassadors to Beijing rang the closing bell at the New York Stock Exchange to mark the 35th anniversary of U.S.-China diplomatic relations. After all, 77 Chinese company stocks now trade on the NYSE. Another big one — e-commerce giant Alibaba — plans to list its stock in the United States, either on the NYSE or NASDAQ.

Trade in goods between the U.S. and China last year hit a record $562 billion. American companies earned nearly $10 billion last year in China, another record. American direct investment in China exceeds $50 billion.

General Motors sells more cars in China than in the United States. General Electric sells China clean power plants that run on methane. Wal-Mart has 390 stores across China. Starbucks runs hundreds of cafes in China.

In a big turnabout, Chinese companies have begun to invest in America, too. Chinese investment in the United States reached $14 billion last year, up from virtually nothing a decade ago.

About 70,000 Americans work for Chinese companies, according to the Rhodium Group consultancy. Chinese firms are being drawn to America by cheap energy and land and by U.S. wages that aren't as high compared with China's as they once were.

Sometimes frictions between two countries can encourage closer ties. U.S.-Japan trade battles, for example, led Japanese automakers to build plants in America in the 1980s and 1990s. China's Tianjin Pipe is building a $1 billion factory in Gregory, Texas — a decision it made after the U.S. imposed sanctions on pipes made in China.

"The investment will continue" unless the U.S.-China disputes get much worse, said Raymond Cheng, CEO of the Sozo Group, a Hong Kong firm that helps Chinese companies invest in America. "Energy costs are rapidly rising and are cheaper in the U.S.... Everybody realizes that manufacturing needs to be closer to the consumer. That's all the incentive and reason for Chinese manufacturers need" to invest in the United States.

Speaking by phone, Cheng noted that he had just left the grand opening of a Chinese shoe factory in Jefferson City, Tennessee.

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